How to Get an SSBCI Loan

When New Center Stamping Inc. started seeking financing to improve its equipment and expand its plant, the company realized it would be hard to persuade banks to invest in them.

"The traditional lending market looks at three areas," said Chris Garvey, New Center Stamping's CFO. "They look at your collateral in the project, they look at cash flow, and they look at current financial condition. They want to see how stable you are; they are pretty risk-averse these days.

"Most of them can overlook what they would consider an air ball in one of those areas. But if you've got an air ball in two or three, then no deal. It's too risky."

New Center had an air ball in the collateral department.

At $20 million a year in revenue, the Detroit-based company — which stamps out hoods, fenders, doors and roofs for the Detroit automakers — had strong cash flow. But the economy was still shaky in late 2012. And the plant, which employs 130, couldn't put up the collateral for the loan.

That made New Center Stamping the ideal candidate for the State Small Business Credit Initiative, a federal lending program created by the 2010 Small Business Jobs Act. New Center was a solid, jobs-generating company caught in one of the cracks of traditional lending.

"There are too many small businesses who don't have access to credit and capital right now, particularly in places like Detroit," said Don Graves, deputy assistant treasury secretary for small business, community development and housing policy — and President Barack Obama's man in Detroit. "We need to do everything we can in these places where it's not as easy to get access. We need to find ways to help the market better respond to the businesses."

Used ... refused

To meet the demand of its customers, New Center Stamping needed to invest in five new presses, each of which weighs between 800 and 900 pounds and costs upward of $5 million.

Garvey wasn't prepared to spend $25 million on new equipment. Instead, the team there decided that the more cost-efficient path was buying used equipment at a fraction of the cost. Instead of $5 million per machine, they could buy one for about $100,000 and then spend $400,000 installing it.

"The $100,000 is about the scrap metal value of that press," Garvey said. "If we didn't buy it, it would get torched. But while it's cost-effective for us to invest through the used-equipment market, the collateral is not there for the banks."

The banks, however, preferred to finance new presses even though the others were less expensive. Why? The new machines could be used as collateral for the loan. The used presses, by comparison, have no real street value and would be useless if New Center defaulted on the loan.

That's where the State Small Business Credit Initiative program, or SSBCI, can help. It provides funding to bridge collateral gaps so businesses can get loans.

Turning $1.5B into $15B

Through the Small Business Jobs Act, the federal government allocated $1.5 billion for states to invest in small businesses and small manufacturers such as New Center Stamping.

The money flows from the U.S. Treasury Department to the states for use in one of five ways: collateral support, loan guarantee, venture capital, loan participation and capital access programs to cover the losses on portfolios of new business loans.

The intent was that the public funds would leverage private financing so the entire program would spur $15 billion in lending nationwide.

Michigan was awarded $80 million and has distributed 84 percent, according to the first annual report on the program, released by Treasury at the end of December.

The Michigan Economic Development Corp., which manages the funds for the state, said these loans are expected to create more than 4,000 jobs and retain 2,100.

Steve Hilfinger, COO and executive vice president of the MEDC

"This supports businesses that are good-performing businesses that are not risky but that traditional programs don't serve," Graves said. "SSBCI allows the states to build programs to respond to the needs in their local communities. It's not one size fits all; there is a lot of flexibility."

Made in Michigan

The roots of the SSBCI program can be found deep in Michigan.

"We kind of invented this," said Steve Hilfinger, COO and executive vice president of the MEDC. "It started as a state program and we took it to Washington. When Treasury made the first allocation of SSBCI funds, the announcement was here in Michigan."

In 2009, during the depths of the recession, the MEDC created two loan programs designed to help the auto suppliers.

"The auto supply chains were hemorrhaging at that time, and we were trying to find solutions to help the banking community continue to finance the auto industry," said Mike Flanagan, director of equity capital programs at the MEDC.

The state allocated $6 million as a trial. The results were so strong — job creation and no loan defaults — that the MEDC wanted to expand the program to meet demand from non-auto companies. So Flanagan and Hilfinger started talking with other states in the region and put together a lobbying package for the White House, calling for additional support for state economic development and small-business lending. At the same time, Treasury was thinking along the same lines and liked what it saw in Michigan.

"Manufacturing was taking a big hit at the time we were creating the program," said Treasury's Graves. "For businesses that relied heavily on the value of their equipment or value of their underlying real estate, it was very difficult — and still is — to get access to credit. So that's why we were so supportive of what Michigan wanted to do, with its initial focus on the auto suppliers."

Showing other states how

One criticism of the SSBCI program is that the states aren't using the money fast enough. Connecticut, for example, had drawn down only 1 percent of its funds at the end of the third quarter of 2013, while Ohio has expended only 16 percent. Nationally, however, Treasury has dispensed $911 million of the $1.5 billion allocated for the program.

"The rates at which participants have used funds continues to vary," according to a recent report by the U.S. Government Accountability Office. "While initial challenges generally have been addressed, others remain."

That means some states have turned to Michigan to help them set up and carry out their programs.

After all, by November 2013, Michigan already had expended $73.8 million of its $80 million award and leveraged an additional $415 million in private lending, according to the MEDC.

"I think one advantage is that our programs were already operating and successful, so we were able to hit the ground running," Flanagan said. "We also have staffed those programs with former banking professionals. It takes time to set those programs up and roll them out so that the banks are familiar and comfortable with them."

Comerica's stamp of approval

Comerica Bank decided to take a risk on New Center Stamping, which is in Detroit's New Center area just north of Midtown. Through the SSBCI collateral program, the MEDC put up $3.7 million to leverage $3.8 million from Comerica. That gave Garvey and New Center President Ric Monkaba $7.5 million to upgrade their equipment and expand the building.

They closed the loan in March 2012 and are expecting to add 65 jobs. More important to Garvey, however, is the number of jobs that the loan helped save.

"It's our expectation based on the market that we are going to grow substantially," he said. "But I think from our perspective, it's more than just creating 65 jobs. It's really about saving the 130 jobs that are here today, because without this investment, it would have been a slow decline to wrapping up and shutting the doors."